NEW DELHI: Subzero inflation has finally come to India with inflation dropping by 1.6% in first week of June to ten months after inflation peaked at 12.9% in early August. Annual inflation was at 0.13% in the week before. India’s negative inflation patch – negative inflation is expected to be short- would essentially be due to a high base effect and supply side issues and is temporary in nature. The retail inflation as measured by consumer price indices is still hovering around 8%.

Inflation, as measured by changes in the wholesale price index over a 12 month period, could even turn out to have some bright spots, policy makers and economists said.The bond markets shrugged off predictions of deflation, saying it is just a statistical effect. “The market understands that this deflation is more of a statistical effect and will not last for more than two months. An inverted yield curve – where long-term bond yields are lower than short-term bond yields – that usually precedes recession and deflation is not seen in India,” says government paper primary dealer IDBI Gilts managing director N S Venkatesh.

Deflation is completely out of the question till industrial output con-tracts in the range of 5%-7%, which does not seem plausible as of now. Dr Pronab Sen country’s chief statistician said that this negative inflation scenario is not going to hurt anyone and it is completely different from the deflation, which we witnessed 33 years ago.

“Then the deflation was driven by an extremely good harvest season and a subsequent drop in food prices to record lows. Unlike then, this time around, the negative inflation will have a positive impact on growth,” said Mr Sen.

“The manufactures stand to benefit as the prices of inputs are coming down at a faster pace than fall in prices of finished goods. The domestic consumption demand remains strong even at a time when the demand from overseas and from private in-vestments has fallen,” Dr Sen added.

“Just because Reserve bank of India is looking at Wholesale Price Index as one of the indicators for formulation policy responses, it falling into negative territory does not mean deflation,” says Chetan Ahaya, Managing Director, and Research at Morgan Stanley. Currently, though private investment and overseas demand have contracted, domestic consumption remains strong enough to drive growth. Hence, the chances of inflation levels staying below zero for a sustained period is ruled out.

source: Economictimes

Tags: india inflation, inflation, inflation drops to negative, inflation from week ended 6 june

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